Who’s Your Auditor

The PCAOB re-proposed including the name of the lead partner in the auditor report last week. The Board seemed split on the proposal when you read their comments. There are those that believe disclosing the partners name will make things more transparent to users of the audit report. They even envision data gathered over time on which individual partners are involved in restatements, lawsuits over financial reports and other issues (and of course which aren’t). The other point of view is that disclosing the partners name won’t do anything for audit quality and it actually might cause problems because auditors will do unnecessary work “just to be sure” and others won’t even consider becoming partners in the first place because of the increased scrutiny and liability such a requirement will create.

On the Industry front, this proposal could create some very interesting dynamics when combined with the existing requirement to change partners every few years. While management and the audit committee are always very interested in who the new partner will be, under the proposed rule that interest will take on more of a public relations bent rather than just caring about whether the person is a good auditor and will work well with the company. In theory companies don’t negotiate with their firm who the specific partner will be, but could you imagine a scenario where an excellent audit partner who was involved in a lawsuit that was settled in the last couple of years was suggested as the next partner for the audit. I could easily see an audit committee telling the firm that if that partner will be the lead partner on the audit, then the company may decide to tender the audit work and go with a different firm. Keep in mind, this decision has nothing to do with the actual audit skills of the partner involved. Instead it has everything to do with PR perceptions of the investors.

While this scenario might actually get rid of a few bad auditors, I think the more likely result is that many good auditors end up being blackballed and more and more young CPAs question why they would ever want to subject their livelihood to such a possibility in the first place.

The really backwards part of this scenario is that less experienced auditors who handle “easier” clients are more likely to have a clean record while more experienced auditors that are willing to take on the tough assignments will likely end up with a black mark or two. This may end up with companies seeking less experienced auditors with a history of not dealing with difficult situations – this is exactly the opposite of what would be considered the necessary ingredients for a better quality audit. Maybe I’m wrong and the scenario I laid out won’t happen, but it sure seems plausible to me. I just wonder if the cost of the potential for lower quality audits is truly outweighed by the benefit from possibly getting rid of a few bad auditors.

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One Comment on “Who’s Your Auditor”

I think of auditing like a report doctor, in contrast to a medical doctor. Surely the disclosure of lead auditors will introduce new forces into the industry-market and will experience turbulence in its transition. In the long run, it should generously reward auditors who are serious about auditing for investors and its markets just as doctors who are serious about practicing for patients and its communities. This could take several generations of practice and reformation due to lack of intersecting supply and demand.

In terms of costs and benefits, there will most definitely a positive impact–unless there is an abrupt change that could be thought of in fiction. Beyond the quality of audits, the timing of implementation is questionable as there exists some point where the competition of financial markets, jurisdictional economic impact, and other factors exist such that it might not be worthwhile. After all, the United States still houses many of the world’s largest public corporations such that some investors won’t care who audited the firm as long as it is one of the Big Four. Other jurisdictions, on the other hand…